And the Money Kept Rolling In (and Out)
Wall Street, the IMF, and the Bankrupting of Argentina

PublicAffairs, New York, 2005, 178 pp., $27.50 (cloth).

Paul Blustein has done it again. In 2001, he published The Chastening,
a fascinating account of the currency and financial crises that began
with the collapse of the Thai baht in 1997. Based heavily on interviews
with the main participants—officials of the crisis-stricken countries,
those of the major industrial countries, and those of the IMF—it
sought to explain how and why so many costly mistakes were made in responding
to the crises. In his new book, And the Money Kept Rolling In (and
Out), Blustein turns to the Argentine crisis of 2001, relying once
more on interviews with the key participants, but rounding out his story
with vivid accounts of the terrible hardships suffered by the victims
of the crisis.

Yet Blustein’s subtitle, which suggests outsiders are to blame
for Argentina’s fall, is rather misleading. There is much in the
book about Wall Street, especially about the all-too-familiar conflicts
of interest besetting Wall Street analysts in investment banking firms
that peddled Argentine debt, as well as the perverse incentives facing
institutional investors who feared being "underweight" in
the country’s debt. There is much in the book about the IMF and
the debates within the Fund as Argentina’s plight grew graver. And
Blustein is perfectly right to argue that Wall Street and the IMF made
big mistakes. Wall Street, in the person of David Mulford, proposed a
$15 billion "megaswap" that had the effect of reducing Argentina’s
maturing debt but hugely raised the interest cost of subsequent debt service.
The IMF, in the person of its Managing Director, Horst Köhler, gambled
imprudently in August 2001, when, with the support of the U.S. Treasury,
he decided that the IMF should lend an additional $8 billion to Argentina,
of which $3 billion would be used in ways unspecified to catalyze a "voluntary"
debt restructuring.

The main mistakes, however, were those made by Argentina, and the first
one was made a full decade before the onset of the crisis. At the start
of the 1990s, Argentina faced rapidly rising inflation, and Domingo Cavallo,
the new Economy Minister, adopted a drastic response. On April 1, 1991,
a new peso was introduced and was pegged at par with the U.S. dollar.
Furthermore, the country’s central bank was constrained to operate
much like a currency board; it could swap dollars for pesos but always
had to hold enough dollars to "back" all of the pesos outstanding.
The new regime served its immediate purpose—bringing down inflation
and holding it down thereafter—but it was ill-suited to the country’s
long-term needs. Argentina trades heavily with Brazil and Western Europe.
Therefore, the depreciation of the Brazilian real vis-à-vis
the dollar and the initial weakness of the euro made Argentina’s
exports less competitive in the country’s most important markets.
There is a dispute about the size of this effect, and Blustein sides with
those who minimize its impact, but there can be no dispute about the terrible
costs imposed by the flight from the peso late in 2001 and by the very
disorderly way in which the peso-dollar link was severed.

Blustein is more critical, and rightly so, of Argentina’s addiction
to debt. The IMF called repeatedly for fiscal reform, including reform
of the strange arrangements that allowed the governors of Argentina’s
provinces to hijack the tax revenues of the central government, but borrowing
was easier than fiscal reform. And when, in the end, Argentina couldn’t
issue additional debt, it adopted a draconian fiscal policy, cutting public
sector wages as well as old-age pensions, at a time when the economy was
contracting sharply. Blustein is perfectly right to blame Wall Street
for lending too much to Argentina, but he would be equally right to blame
Argentina for borrowing too much from Wall Street.

This is a remarkable book, rich in detail and very well written. It tells
a tragic tale of dubious policies crafted by domineering personalities.
Like The Chastening, however, it lays too much blame on outsiders
and too little on those whose pride in their accomplishments led them
to discount the grave risks they were running.

Peter B. KenenSenior Fellow, Council on
Foreign Relations
New York

Chasing the data as much as the money

Peter Reuter and Edwin M. Truman

Chasing Dirty Money
The Fight Against Money Laundering

Institute for International Economics, 2004, 226 pp.,
$23.95 (cloth).

The AML regime is no longer all about drugs." With these words,
Peter Reuter and Edwin Truman reveal the new realities of the fight against
money laundering. No longer focused solely on combating the drug trade,
anti–money laundering (AML) regimes are now fighting everything
from terrorist financing to corruption and tax evasion.

For those not familiar with the topic, the book’s early chapters
serve as a primer. The authors define money laundering as the "conversion
of criminal incomes into assets that cannot be traced back to the underlying
crime." They review money laundering methods, markets, the estimated
volume of money laundering activity, and existing preventive measures
and enforcement tools.

According to Reuter and Truman, an ideal AML regime would be based on
"national and international building blocks, a firm legal and enforcement
foundation, and close interaction between the public and private sectors,"
whose overriding goal would be to ensure "uniform enforcement and
seamless cooperation across national jurisdictions." But this ideal
is not attainable because each country has its own institutions, perspectives,
and priorities, they say.

Chasing Dirty Money is most compelling in its discussion of data
on money laundering—or rather the lack thereof. The authors describe
their attempts to find data to support their analysis in a number of areas,
including the global scope of money laundering in real dollar terms; the
financial and nonfinancial costs of money laundering to governments, the
private sector, and individual consumers; and the effectiveness of prevention
and enforcement. In all these cases, Reuter and Truman were unable to
obtain information—raising questions about the effectiveness of
current money laundering regimes, which are based largely on assumptions
and anecdotal evidence.

The book is driven by the U.S. experience, which the authors believe
is justified both because of the leading role the country plays in AML
efforts and because the U.S. AML regime is the most advanced in the world,
or so they say. But the authors present no facts to back up this last
claim—for example, nowhere is there a robust comparison with other
systems. The bias is not absolute, however, as the book does criticize
aspects of the U.S. system. In the end, the reader is left to conclude
that there is no perfect system, with the authors suggesting that more
should be done to improve international cooperation, review existing laws,
and strengthen enforcement.

Assessments of economic policy in developing countries often take for
granted that the government, its institutions, and the legal framework
will ensure good governance. This presumption is now being challenged
by the new "transaction cost political perspective," pioneered
by Avinash Dixit (Princeton University). Economic policy has to be negotiated
at each stage—from formulation to implementation—with each
concomitant cost being determined by the layers of institutions and procedures.
Efforts to reduce these costs can be formidable when the work culture
and ethos of existing institutions are at odds with the demands of economic
development.

The insights of the transaction cost theorists are exceedingly well captured
in Arun Shourie’s terse and episodic narrative of India’s
transition from controlled to market economy. Shourie’s multidimensional
personality as academic, international civil servant, passionate pro bono
crusader, and idealistic disinvestment and planning minister makes this
book instructive reading. He shows how first-best economic policies often
fail for want of effective governance. For instance, he recounts the fate
of many loss-making public enterprises that were slated for closing by
the reconstruction agency: "Governments have not been able to act
on the recommendation. Political pressure has been mounted to prevent
closure. Stay orders have been secured from all courts. Pledges have been
made that new revival schemes will be explored. And all the while the
public exchequer has continued to be bled—to keep the corpses around."

State governments unable to raise resources because of caps on their
borrowing do so surreptitiously by guaranteeing loans raised by corporations
in their jurisdictions. And when public enterprises suffer heavy losses,
the Indian government tinkers with "revival packages" that
end up costing taxpayers millions of rupees. Despite strictures by government
auditors, public sector enterprises carry on regardless of losses. This
leads the author to formulate Shourie’s Law: "The more governmental
an enterprise, the more unaccountable it is; the more unaccountable an
enterprise, the more uncompetitive it is."

Equally egregious is Shourie’s example of a case of disinvestment
as it worked itself through India’s labyrinthine system. A decision
was made to disinvest some of the government-owned hotels. But the process
dragged on for many reasons: the workers’ union would not allow
the disinvestment advisers to visit the hotels; it proved impossible to
figure out who owned the land on which the hotels had been built and what
the terms and conditions were for the lease; and then there was the interministerial
squabbling. In the end, only a few hotels were divested and with enormous
cost and waste of resources. Shourie also recounts the attempt of the
finance ministry to draft a model tender document for civil projects for
which international bids were invited. Committee after committee was set
up over 12 years to settle the issue, ignoring the fact that standard
bidding documents for international bidding were already being used in
all World Bank-assisted projects.

If weak governance and institutions can imperil economic progress in
India, a poster child for shining growth, where does that leave very poor
countries with ill-educated populations and endemic social conflicts that
lack historical, legal, and institutional culture? Shourie’s book
contains chastening lessons for international financial institutions that
blithely put the cart of well-chiseled macroeconomic policies before the
horse of indispensable microeconomic preconditions (including those related
to appropriate institutions and good governance); for the bemused missionaries
of massive foreign aid to lawless countries; and for the new breed of
development economists who see virtue in homegrown programs—the
latest buzzword in countries lacking an effective autonomous policymaking
apparatus.